Journal of Derivatives, Fall 2003 v11 i1 p1(2) 
Stephen Figlewski.  

A year ago at this time, due to a high rate of time preference, I announced 
that it was the tenth anniversary of The Journal of Derivatives. But 
calendar purists pointed out that only with the first issue of Volume 11 
could we really be said to have completed 10 years of publication. In which 
case, the current issue calls for another celebration. Let's drink a toast 
to the JOD's True 10th Anniversary, and wish for many more. 

This issue has interesting articles covering a wide range of topics. Our 
lead article, by Ayache, Forsyth, and Vetzal, combines analysis of credit 
risk, interest rate risk, equity risk, and embedded call and put options all 
in the same security: convertible bonds. These complex securities have 
become extremely popular in the difficult financial environment of the last 
few years, and this article helps put some order to the complexity. The 
second article explores credit risk, too, but from the perspective of 
modeling the option-adjusted spreads (OAS) on bond indexes for different 
credit rating classes. Huang and Kong find that OAS, especially for riskier 
bonds, is significantly affected by term structure variables, naturally, but 
also by measures of overall conditions in the macroeconomy (e.g., an index 
of leading economic indicators) and the equity markets (e.g., the return on 
the Russell 2000 stock index). 

Stochastic volatility and the pricing of equity options is an important area 
in which much research has still left us with an uneasy feeling that we 
don't fully understand how the real world works. There is very strong 
evidence that stock return volatilities are stochastic. But is volatility 
risk priced in the market? If so, is total volatility priced, or just the 
part of volatility that is correlated with the market? What is the 
connection between expected (actual) volatility and implied (risk-neutral) 
volatility? Our third article, by Bakshi and Kapadia, addresses these 
interesting issues by examining the returns to delta-hedged positions for 
options on 25 actively traded stocks. In answer to the third question, the 
article suggests that the difference between implied volatility and expected 
volatility provides one measure of the market price of volatility risk. 

The fourth article presents some interesting evidence that option-type 
payoffs are very, attractive to European investors, and that they seem 
willing to pay a premium for structured products that provide those payoffs, 
even when the same patterns can be (approximately) replicated using actual 
options and the underlying. The final article describes a contingent 
security with a rather special payoff: an arithmetic average reset option. 
The strike price can be reset periodically, meaning that a long maturity 
option cannot go deep out of the money and become essentially in the sorth 
run. Moreover, after reset the strike is based on the average price of the 
underlying, which reduces problems with regular reset options due to noisy 
market prices and jump in delta near the reset dates. The article provides a 
useful valuation methodology for such securities that handles the technical 
difficulty that the underlying does not have a tractable distribution, 
because it is an arithmetic average of lognormal variables. 

Well, the plan on enlist derivatives in the nation's service did not pan 
out. The "Terrorism Futures Market" proposed by the U.S. Department of 
Defense may have set a new record in speed of failure for a futures 
contract, after it was found that a lot of people felt very strongly that 
the idea was (pick one or more:) 

a) weird 

b) an innovative way to use the market to produce information 

c) clever but flawed 

d) doomed to failure 

e) really stupid 

f) all of the above 

For any part, I was anticipating a wave of new manuscript submissions. 
Papers on estimating convenience yields for terrorism futures, hedging 
strategies with terrorism futures, properties of the risk-neutral density of 
terrorist attacks, and many others all seemed likely. Oh well. Not all 
market innovations succeed; perhaps this one was just ahead of its time. 

Stephen Figlewski 

Editor 

P.S. My personal answer to the multiple choice question: f) all of the 
above. But I don't feel strongly.